Why bank guarantees need blockchain

Hari Janakiraman, Rodolf Salem & Chris T’en

Technology innovations can open the doors to new ways of working and new opportunities for creating value. Distributed ledger technology (DLT) — more commonly, ‘blockchain’ — is no different and has potential applications across many industries.

Financial services companies use of ledgers to track the movement of value but this age old technology is uniquely situated to leverage blockchain’s ability to improve efficiency and accuracy.

ANZ and Westpac — two providers of bank guarantees — recently partnered with Scentre Group — the owner and operator of Westfield in Australia and New Zealand — and IBM — a leader in blockchain and DLTs — to test if a blockchain solution could replace the current manually issued bank guarantee process.

The nature of blockchain allows for the encryption of information which cannot be easily changed or falsified. Once this information is shared on the ledger it becomes the single source of truth for the existence and status of a contract between parties.

Historically, technical limitations along with embedded cross-industry practices have made some areas of financial services slower to change.

This is not to say the industry has stood still. From mainframes and messaging networks in the 60s and 70s to the rise of the internet and mobile in the 90s and 00s the financial services industry has shown an ability to adopt new tech which improves efficiency and customer experience.

In the modern day, game-changers like the Property Exchange Australia (PEXA) are removing the need for cheques and face-to-face meetings in property transactions. But while progress has been ample, other areas are still ripe for revolution.

Bank guarantees — a bank’s unconditionalpromise to pay one party in the event of another’sdefault — are used across many industries to securecontracts, be it in the trade of goods and services,financial transactions, industrial projects, thedevelopment of property or the leasing of assets.

As a paper-based instrument bank guarantees are subject to a number of limitations, including:

• Tracking and reporting: challenges in the tracking, reporting and overall transparency of a guarantee’s status as it undergoes potentially multiple handoffs and changes throughout its lifecycle; and

• Lack of standardisation: manual effort required to review and negotiate the terms and conditions of a guarantee, which can vary by bank and by landlord.

There had to be a better way.

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Use cases for a DLT solution.

Solution

As part of an initial proof of concept, ANZ and Westpac hoped to assess if blockchain could replace the current paper-based process.

To prove feasibility in a short period of time, the scope was narrowed to commercial property leasing, where bank guarantees are commonly used by prospectivetenants to secure a contract in lieu ofa cash deposit or rental bond.For landlords, they provide certainty in the event of the tenant’s default, while also avoiding theadministrative burden of managing cash deposits andtrust accounts.

The whitepaper concludes a blockchain-based solution, if adopted across the industry, has the broad potential to reduce fraud, drive standardisation and increase efficiency for tenants, landlords and banks.

The next steps are two-fold:

• Other lenders and the commercial property sector must be engaged to drive commercialisation and adoption of this technology solution; and

• The application of this solution must be explored across other industries like the trade of goods and services, financial transactions, industrial and property development projects or the development of property.

Adoption

As with most DLT solutions, the benefits can only be realised through broad industry adoption. The changes required are pervasive and will require close collaboration between competitors, regulators, consumers, technologists and the legal community in order to succeed.

This will be no small feat. But what this proof of concept has demonstrated is a willingness from the industry to collaborate towards a common goal. This discussion now needs to be extended to a broader range of industry participants — their inclusion will be a core step in the roadmap towards industry adoption.

Distributed ledger technologies can facilitate the transition of many industries into the digital age — but only those willing to come together to innovate.

Every day, payment disruptors and competitors across the globe are reminding banks the cross-border payment industry is ripe for rejuvenation, promising faster and lower cost alternatives to the current international payment process. Customers expect more and banks are investing to meet and exceed those expectations.

Tristan Chan
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Author, Global-is-Asian

Touted as a revolutionary technology, blockchain is a shared, immutable ledger which can be used across various industries to record transaction histories, thus building trust through accountability and transparency.